US stocks slide as bond yields surge on trade war worries

Tuesday

Aug 27, 2019 at 5:21 PM

Stocks capped a wobbly day on Wall Street with broad losses Tuesday as anxious investors shifted money to U.S. government bonds, gold and other traditional safe-haven assets.

The selling, which erased some of the market's gains from a strong rally a day earlier, came as long-term bond yields once again fell below short-term ones, a rare phenomenon that has correctly predicted previous recessions.

Worries that the costly trade war between the U.S. and China will drag the U.S. economy into a recession have increased demand for U.S. government bonds. On Tuesday, that pulled the yield in the 10-year Treasury below that of the two-year Treasury.

This so-called inversion of the U.S. yield curve has accurately predicted the past five recessions.

"You have a symptom in the inversion, but really the cause of that symptom is the tariffs and the trade war causing a global slowdown," said Dan Heckman, national investment consultant at U.S. Bank Wealth Management.

The S&P 500 fell 9.22 points, or 0.3%, to 2,869.16. The benchmark index has fallen for the past four weeks in a row.

The Dow Jones Industrial Average dropped 120.93 points, or 0.5%, to 25,777.90. The Nasdaq slid 26.79 points, or 0.3%, to 7,826.95.

Smaller company stocks bore the brunt of the selling, which sent the Russell 2000 index down 19.96 points, or 1.4%, to 1,456.04.

Major indexes in Europe closed mostly higher.

The major U.S. indexes are on track for losses of 3% or more in August in what has been a volatile month for the market.

From the get-go Tuesday the indexes appeared headed to extend the gains from Monday's rally. But they turned lower by midmorning as the inversion between long-term and short-term bond yields became more worrisome.

The yield on the 10-year Treasury note tumbled to 1.48% from 1.54% late Monday. It briefly dropped to 1.468%. At the same time, the yield on the two-year Treasury dropped to 1.51%, down from 1.53% a day earlier. The yield at one point climbed as high as 1.54%.

When the yield curve inverted earlier this month for the first time since 2007, it led to a broad market sell-off.

While the inversion in the yield curve has been a good indicator of a coming recession in the past, it usually means a recession is at least a year off, said J.J. Kinahan, chief market strategist for TD Ameritrade.

"Just because it happened doesn't mean the world ends," he said. "We do still have the China tariff situation, which many believe, if settled quickly, could also lead to a quick economic expansion."

Financial sector stocks fell the most as bond prices surged, which pulled yields sharply lower. When yields decline it means lower profits for banks, because they pull down interest rates on mortgage and other loans. JPMorgan Chase fell 1.1% and Citigroup dropped 1.7%.

The latest losses mark a shift in investor sentiment from just a day earlier, when tentative optimism about the potential for progress in the trade war drove a broad market rally.

Last week, the trade conflict escalated again with Washington and Beijing threatening new tariffs on each other's goods, triggering a sharp sell-off in global markets. On Monday the market recouped some of those losses after President Donald Trump said his negotiators had received encouraging calls from China over the weekend. Traders drew encouragement from the development, even though China's foreign ministry denied knowledge of any such calls.

Market watchers are becoming increasingly circumspect about what lies ahead. UBS, the largest wealth manager in the world, recommended that customers reduce their exposure to stocks, the first time the bank has done so since the depths of Europe's debt crisis in 2012.

"What's still rattling investors is the reality that the trade war is dragging on and, despite discussions about an upcoming meeting, the market is losing confidence that perhaps that might take place," Heckman said.

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